Article
Unfolding the Upstream Reform
China Oil & Gas Reform Series II
The report
This report was jointly created by the Deloitte Energy, Resources & Industrials Industry, Deloitte Research team and Deloitte Financial Advisory. This report analyses China upstream reform in three areas: background and reform momentum, opportunities for investment, and challenges & best practice.
Viewpoints / key findings
Background and reform momentum
State oil companies face challenges in boosting production while struggling with higher development costs. The China government intends on opening up the upstream sector to help sustain energy supply, encourage qualified market players to participate in exploration and development of conventional oil and gas, and ultimately create a market that is led by state-owned oil companies but with the participation of diversified investors. In this response several pieces of legislation have been issued in regard to the granting of mineral rights in China.
Opportunities for investment
This wave of reform will introduce new opportunities for the industry to integrate and reallocate existing resources. It is hoped that this will result in the anticipated domestic restructuring as well as inbound M&A opportunities for the industry. Three types of oil and gas companies are expected to gain access to onshore conventional oil and gas, thus gaining new opportunities for development. They are: (1) Provincial SOEs located in oil and gas resources-rich provinces; (2) Private oil and gas companies who owns overseas assets with overseas exploration experience; (3) Oil service companies with domestic oil field service experience.
Challenges and best practice
As the reform unfolds, it brings new challenges in many aspects. One challenge is in regard to financing. If private capitals intends to seize the opportunity during the reform, they may need to cooperate with others given the intense capital requirements. In addition, despite the optimistic expectation of the recovery of the upstream sector, there will need to be a well-designed Oil and Gas sector reform package that has an effective regulatory environment.
